The five most important factors for the success of a venture capital investment
The Széchenyi Tőkealap, a capital fund collected the most common factors and mistakes that can lead venture capital investments to failure.
The success of a venture capital investment depends on various factors, and the five most important of them were collected by Széchenyi Tőkealap capital fund.
One of the critical factors is leaking money. A common mistake made is spending the capital on costs like membership loans provided by the owner of the enterprise, and there is no other source than the venture capital invested. Or it can happen that the capital is used for buying shares from one of the shareholders in order to reduce his share in the company. These issues can be foreseen and must be clarified in advance in order to avoid unexpected costs.
The so called soft costs also carry some risk. The company management has to define in advance very carefully the budget these soft costs such as travel, conferences, exhibitions and marketing activity, and also render them performance based.
The relationship between the investor and the company’s management is a key issue. The investor should introduce reporting systems, in order to receive a regular update about the status of the investment project. Data of the company management should be provided at least monthly once. With data provided only in every quarter of the year negative processes can begin and there may not remain enough time to reverse them. Therefore, the investor should insist on monthly reporting from the beginning, even if the management of the company feels this to be an unnecessary fatigue, and will lead to conflicts.
Another important question is whether or not the owner of the company can mobilize capital in case of emergency. A certain amount of back up capital must be kept ready, if not for anything else but for the maintenance of the cash flow,” says Imre V. Csuhaj, president and managing director of Széchenyi Tőkealap.
The legal vendor due diligence is not least important, and its execution is the responsibility of investor. If the legal status of the company is not clarified, the investor can face unpleasant surprises along the way such as unrevealed legal disputes and litigation, missing permissions and non-appropriate employment contracts. Any of these problems can lead the project to an end, therefore completing a previous vendor due diligence is an absolute must.
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